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Cosi 10-Q 2011

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.1

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 28, 2011

 

OR

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from       to      

 

Commission File No. 000-50052

 

COSÌ, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

06-1393745

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

1751 Lake Cook Road
Deerfield, Illinois 60015

(Address of principal executive offices) (Zip Code)

 

(847) 597-8800

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o

Accelerated filer o

Non-Accelerated filer o

Smaller reporting company x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x

 

Number of shares of Common Stock, $.01 par value, outstanding at May 6, 2011: 51,738,891

 

 

 



Table of Contents

 

COSI, INC.

 

Index to Form 10-Q

For the three-month period ended March 28, 2011

 

 

 

Page Number

 

 

 

PART I.   FINANCIAL INFORMATION

 

 

 

Item 1.

Financial Statements (Unaudited)

 

 

 

 

 

Consolidated Balance Sheets — as of March 28, 2011 and December 27, 2010

3

 

 

 

 

Consolidated Statements of Operations — Three-month periods ended March 28, 2011 and March 29, 2010

4

 

 

 

 

Consolidated Statement of Stockholders’ Equity — Three-month period ended March 28, 2011

5

 

 

 

 

Consolidated Statements of Cash Flows — Three-month periods ended March 28, 2011 and March 29, 2010

6

 

 

 

 

Notes to Condensed Consolidated Financial Statements

7-10

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

11-22

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

22

 

 

 

Item 4.

Controls and Procedures

23

 

 

 

PART II. OTHER INFORMATION

 

 

 

Item 1.

Legal Proceedings

24

 

 

 

Item 1A.

Risk Factors

24

 

 

 

Item 6.

Exhibits

24

 

 

 

SIGNATURES

25

 

 

 

EXHIBIT INDEX

26

 

 

 

CERTIFICATIONS

27-29

 

2



Table of Contents

 

PART I.  FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

Cosi, Inc.

Consolidated Balance Sheets

As of March 28, 2011 and December 27, 2010

(dollars in thousands, except share and per share data)

 

 

 

March 28,

 

December 27,

 

 

 

2011

 

2010

 

 

 

(Unaudited)

 

(Note 1)

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

9,284

 

$

10,307

 

Accounts receivable, net

 

709

 

697

 

Notes receivable, current portion

 

574

 

506

 

Inventories

 

731

 

744

 

Prepaid expenses and other current assets

 

1,460

 

1,639

 

Total current assets

 

12,758

 

13,893

 

 

 

 

 

 

 

Furniture and fixtures, equipment and leasehold improvements, net

 

14,208

 

15,009

 

Notes receivable, net of current portion

 

1,057

 

1,195

 

Other assets

 

1,221

 

1,254

 

Total assets

 

$

29,244

 

$

31,351

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

3,080

 

$

2,992

 

Accrued expenses

 

9,380

 

9,237

 

Deferred franchise revenue

 

61

 

61

 

Current portion of other long-term liabilities

 

435

 

545

 

Total current liabilities

 

12,956

 

12,835

 

 

 

 

 

 

 

Deferred franchise revenue

 

2,238

 

2,238

 

Other long-term liabilities, net of current portion

 

4,360

 

4,592

 

Total liabilities

 

19,554

 

19,665

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Common stock - $.01 par value; 100,000,000 shares authorized, 51,738,891 and 51,682,891 shares issued, respectively

 

517

 

517

 

Additional paid-in capital

 

283,532

 

283,388

 

Treasury stock, 239,543 shares at cost

 

(1,198

)

(1,198

)

Accumulated deficit

 

(273,161

)

(271,021

)

Total stockholders’ equity

 

9,690

 

11,686

 

Total liabilities and stockholders’ equity

 

$

29,244

 

$

31,351

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

3



Table of Contents

 

Cosi, Inc.

Consolidated Statements of Operations

For the Three Month Periods Ended March 28, 2011 and March 29, 2010

(dollars in thousands, except share and per share data)

 

 

 

Three Months Ended

 

 

 

March 28,

 

March 29,

 

 

 

2011

 

2010

 

 

 

(Unaudited)

 

(Unaudited)

 

Revenues:

 

 

 

 

 

Restaurant net sales

 

$

23,005

 

$

27,074

 

Franchise fees and royalties

 

704

 

525

 

Total revenues

 

23,709

 

27,599

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

Cost of food and beverage

 

5,296

 

6,329

 

Restaurant labor and related benefits

 

8,742

 

10,664

 

Occupancy and other restaurant operating expenses

 

7,703

 

9,044

 

 

 

21,741

 

26,037

 

General and administrative expenses

 

3,056

 

3,321

 

Depreciation and amortization

 

1,065

 

1,380

 

Closed store costs

 

21

 

 

Lease termination expense

 

17

 

1

 

Gain on sale of assets

 

(41

)

(87

)

Total costs and expenses

 

25,859

 

30,652

 

Operating loss

 

(2,150

)

(3,053

)

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

Interest expense

 

 

(1

)

Other income

 

10

 

 

 

 

 

 

 

 

Net loss

 

$

(2,140

)

$

(3,054

)

 

 

 

 

 

 

Per Share Data:

 

 

 

 

 

Loss per share, basic and diluted

 

$

(0.04

)

$

(0.06

)

 

 

 

 

 

 

Weighted average shares outstanding:

 

51,254,279

 

48,982,134

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

4



Table of Contents

 

Cosi, Inc.

Consolidated Statement of Stockholders’ Equity

For the Three Months Ended March 28, 2011

(unaudited)

(dollars in thousands, except share data)

 

 

 

Common Stock

 

Treasury Stock

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

Number of

 

 

 

Paid In

 

Number of

 

 

 

Accumulated

 

 

 

 

 

Shares

 

Amount

 

Capital

 

Shares

 

Amount

 

Deficit

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 27, 2010

 

51,682,891

 

$

517

 

$

283,388

 

239,543

 

$

(1,198

)

$

(271,021

)

$

11,686

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of restricted stock, net of forfeitures

 

56,000

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

144

 

 

 

 

 

 

 

144

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(2,140

)

(2,140

)

Balance, March 28, 2011

 

51,738,891

 

$

517

 

$

283,532

 

239,543

 

$

(1,198

)

$

(273,161

)

$

9,690

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

5



Table of Contents

 

Cosi, Inc.

Consolidated Statements of Cash Flows

For the Three Month Periods Ended March 28, 2011 and March 29, 2010

(dollars in thousands)

 

 

 

March 28,

 

March 29,

 

 

 

2011

 

2010

 

 

 

(Unaudited)

 

(Unaudited)

 

Cash flows from operating activities:

 

 

 

 

 

Net loss

 

$

(2,140

)

$

(3,054

)

Adjustments to reconcile net loss to net cash used in operating activities

 

 

 

 

 

Depreciation and amortization

 

1,065

 

1,380

 

Gain on sale of assets

 

(41

)

(87

)

Provision for bad debts

 

37

 

10

 

Stock-based compensation expense

 

144

 

237

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(49

)

(117

)

Notes receivable

 

70

 

4

 

Inventories

 

13

 

33

 

Prepaid expenses and other current assets

 

179

 

520

 

Other assets

 

8

 

20

 

Accounts payable and accrued expenses

 

224

 

(467

)

Deferred franchise revenue

 

 

(60

)

Lease termination reserve

 

(53

)

(154

)

Other long-term liabilities

 

(282

)

(236

)

Net cash used in operating activities

 

(825

)

(1,971

)

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Capital expenditures

 

(264

)

(122

)

Proceeds from sale of assets

 

66

 

171

 

Net cash (used in) provided by investing activities

 

(198

)

49

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from issuance of common stock

 

 

5,226

 

Common stock issuance costs

 

 

(331

)

Net cash provided by financing activities

 

 

4,895

 

 

 

 

 

 

 

Net (decrease) increase in cash and cash equivalents

 

(1,023

)

2,973

 

Cash and cash equivalents, beginning of period

 

10,307

 

4,079

 

Cash and cash equivalents, end of period

 

$

9,284

 

$

7,052

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

Cash paid for:

 

 

 

 

 

Corporate franchise and income taxes

 

$

20

 

$

115

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

6



Table of Contents

 

COSI, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 1 - Basis of Presentation

 

We have prepared the accompanying unaudited condensed consolidated financial statements in accordance with the requirements of Form 10-Q and, therefore, they do not include all information and footnotes necessary for a fair presentation of financial position, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”).  In our opinion, the financial statements reflect all adjustments that are necessary for a fair presentation of the results of operations for the periods shown. All such adjustments are of a normal recurring nature. In preparing financial statements in conformity with U.S. GAAP, we must make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures at the date of the financial statements and during the reporting period. Actual results could differ from those estimates.

 

As used in this quarterly report on Form 10-Q, unless the context requires otherwise, the terms “we,” “our,” “Company” or “Cosi” refer to Cosi, Inc. and its consolidated subsidiaries.

 

The balance sheet at December 27, 2010 has been derived from audited financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.

 

The results for the three-month periods ended March 28, 2011 and March 29, 2010 are not indicative of the results for the full fiscal year.

 

Certain amounts in the March 29, 2010 consolidated statement of operations have been reclassified to conform to the March 28, 2011 presentation.

 

This Report should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended December 27, 2010, as filed with the Securities and Exchange Commission (“SEC”).

 

There have been no material changes to our significant accounting policies and estimates from the information provided in Note 1 of our consolidated financial statements included in our Form 10-K for the fiscal year ended December 27, 2010.

 

Note 2 — Stock-Based Compensation Expense

 

A summary of non-cash, stock-based compensation expense is as follows:

 

 

 

For the Three Months Ended

 

 

 

(in thousands)

 

 

 

March 28,
2011

 

March 29,
2010

 

 

 

 

 

 

 

Stock option compensation expense

 

$

 

$

1

 

Restricted stock compensation expense, net of forfeitures

 

144

 

236

 

Total non-cash, stock-based compensation expense, net of forfeitures

 

$

144

 

$

237

 

 

As of March 28, 2011, all compensation expense related to stock options granted under the Company’s various incentive plans have been recognized in full. As of March 28, 2011, there was approximately $0.5 million of

 

7



Table of Contents

 

COSI, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — continued

 

total unrecognized compensation expense related to restricted stock shares and units granted under the Cosi, Inc. 2005 Omnibus Long-Term Incentive Plan (the “2005 Plan”). The expense related to these grants is being recognized on a straight-line basis from the date of each grant through fiscal 2015.

 

During the first quarter of fiscal 2011, pursuant to the 2005 Plan and in accordance with the terms and conditions prescribed by the Compensation Committee of our Board of Directors, we granted and issued 98,000 restricted stock shares and 100,000 restricted stock units to key employees. The vesting of these shares and stock units will occur as follows: (i) 20% of the stock shares and stock units vested on the grant date, and (ii) an additional 20% of the stock shares and stock units will vest on each anniversary of the grant date provided that at each such date the employee continues to be employed by the Company. The value of the shares and the stock units for the grants made during the first quarter of fiscal 2011, based on the closing price of our common stock on the date of the grants, was approximately $0.3 million. During the first quarter of fiscal 2010, we granted and issued 238,250 restricted stock shares and 200,000 restricted stock units to key employees. The value of these restricted stock shares and units, based on the closing price of our common stock on the date of the grants, was approximately $0.4 million.

 

Stock-based compensation expense, net of forfeitures, relating to grants for restricted stock shares and restricted stock units of approximately $0.1 million and $0.2 million is included in the accompanying consolidated statements of operations for the quarters ended March 28, 2011 and March 29, 2010, respectively.

 

During the first quarter of fiscals 2011 and 2010, 42,000 and 1,200 shares, respectively, of previously issued restricted common stock were forfeited. The value of the forfeited shares, based on the closing price of our common stock on the date of the grants, was approximately $0.1 million and $0.01 million, respectively. The accompanying consolidated statements of operations for the three-month periods ended March 28, 2011 and March 29, 2010 reflects the reversal of approximately $0.02 and $0.01 million, respectively, of previously amortized costs related to these forfeited shares.

 

Note 3 — Earnings Per Share

 

Basic and diluted loss per common share is calculated by dividing the net loss by the weighted average common shares outstanding during the period. As of March 28, 2011 and March 29, 2010, there were, respectively, 190,800 and 247,600 unvested restricted shares of common stock outstanding and 447,342 and 590,521 out-of-the-money stock options to purchase shares of common stock. There were no in-the-money stock options as of the end of first quarter of fiscals 2011 and 2010. The unvested restricted shares meet the requirements for participating securities but were not included in the computation of basic and diluted earnings per share because we incurred a net loss in all periods presented and, hence, the impact would be anti-dilutive. The outstanding out-of-the-money stock options to purchase shares of common stock do not meet the requirements for participating securities and were not included in the computation of basic and diluted earnings per share. At March 28, 2011 and March 29, 2010, there were, respectively, 255,000 and 270,000 unvested restricted stock units. The unvested stock units do not meet the requirements for participating securities and were not included in the computation of basic and diluted earnings per share.

 

Note 4 — Asset impairments

 

In accordance with FASB Accounting Standards Codification Topic 360 (ASC Topic 360), Property, Plant & Equipment, we evaluate possible impairments at the individual restaurant level periodically and record an impairment loss whenever we determine impairment factors are present. We consider a history of poor financial operating performance to be the primary indicator of potential impairment for individual restaurant locations. We determine whether a restaurant location is impaired based on expected undiscounted cash flows, generally for the remainder of the lease term, and then determine the impairment charge based on discounted cash flows for the same period.

 

8



Table of Contents

 

COSI, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — continued

 

Restaurants are not considered for impairment during the period before they enter the comparable restaurant base, unless specific circumstances warrant otherwise.

 

We did not record any asset impairment charges during the first quarter of fiscals 2011 and 2010.

 

Note 5 - Lease Termination Costs

 

During the first quarter of fiscal 2011, we recorded a lease termination charge of approximately $0.02 million related to additional costs associated with our exercise of an option in the lease to surrender part of the office space at our Corporate Headquarters during the fourth quarter of 2010. During the first quarter of fiscal 2010 we incurred lease termination costs of less than $0.01 million.

 

Future store closings, if any, resulting from our decision to close underperforming locations prior to their scheduled lease expiration dates may result in additional lease termination charges. For all exit activities, we estimate our likely liability under contractual leases for restaurants that have been closed. Such estimates have affected the amount and timing of charges to operating results and are impacted by management’s judgments about the time it may take to find a suitable subtenant or assignee, or the terms under which a termination of the lease agreement may be negotiated with the landlord. We recognize costs associated with exit or disposal activities when they are incurred, rather than at the date of a commitment to an exit or disposal plan.

 

Note 6 - Contingencies

 

From time to time, we are a defendant in litigation arising in the ordinary course of our business, including but not limited to claims resulting from “slip and fall” accidents, claims under federal and state laws governing access to public accommodations or other federal and state laws applicable to our business operations, employment-related claims, property damages, claims from guests alleging illness, injury or other food quality, health or operational concerns, and enforcement of intellectual property rights.

 

As of the date of this report, there are no legal proceedings pending which, at this time, are expected to have a material adverse effect if decided against the Company.

 

Note 7 — Income Taxes

 

We have recorded a full valuation allowance to reduce our deferred tax assets related primarily to net operating loss carryforwards. Our determination of the valuation allowance is based on an evaluation of whether it is more likely than not that we will be able to utilize the net operating loss carryforwards, based on the Company’s operating results. A positive adjustment to income will be recorded in future years if we determine that we could realize these deferred tax assets.

 

As of December 27, 2010, we had net operating loss (“NOL”) carryforwards of approximately $193.9 million for U.S. federal income tax purposes. Under the Internal Revenue Code, an “ownership change” with respect to a corporation can significantly limit the amount of pre-ownership change NOLs and certain other tax assets that the corporation may utilize after the ownership change to offset future taxable income, possibly reducing the amount of cash available to the corporation to satisfy its obligations. An ownership change generally would occur if the aggregate stock ownership of holders of at least 5% of our stock increases by more than 50 percentage points over the preceding three year period. We do not believe that the rights offering that we filed during our first quarter of fiscal 2010 has triggered an ownership change. In addition, a limitation would not have an impact on our consolidated financial statements as we have recorded a valuation allowance for the entire amount of our deferred tax assets.

 

We adopted ASC 740-10, Income Taxes, which prescribes a comprehensive financial statement model of how a company should recognize, measure, present and disclose uncertain tax positions that the company has taken

 

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Table of Contents

 

COSI, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — continued

 

or expects to take in its income tax returns. The standard requires that only income tax benefits that meet the “more likely than not” recognition threshold be recognized or continue to be recognized on the effective date. Initial recognition amounts would have been reported as a cumulative effect of a change in accounting principle.

 

No adjustment was made to the beginning retained earnings balance in fiscal 2007, as the ultimate deductibility of all tax positions is highly certain but there is uncertainty about the timing of such deductibility. No interest or penalties have been accrued relative to tax positions due to the Company having either a tax loss or net operating loss carryforwards to offset any taxable income in all subject years. As a result, no liability for uncertain tax positions has been recorded.

 

Should the Company need to accrue interest or penalties on uncertain tax positions, it would recognize the interest as interest expense and the penalties as a general and administrative expense.

 

Due to our unexpired NOLs, Cosi could be subject to IRS income tax examination for the tax year 1996 and all subsequent years. We could also be subject to state income tax examinations in certain states where we have unexpired NOLs.

 

10



Table of Contents

 

Item 2:   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of our financial condition and results of operations for the fiscal quarters ended March 28, 2011 and March 29, 2010 should be read in conjunction with “Selected Consolidated Financial Data” and our audited consolidated financial statements and the notes to those statements that are in our 2010 Annual Report on Form 10-K. Our discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under “Cautionary Note Regarding Forward-Looking Statements” below and elsewhere in this Quarterly Report.

 

OVERVIEW

 

System wide restaurants:

 

 

 

For the Three Months Ended

 

 

 

March 28, 2011

 

March 29, 2010

 

 

 

Company-
Owned

 

Franchise

 

Total

 

Company-
Owned

 

Franchise

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restaurants at beginning of period

 

83

 

59

 

142

 

99

 

46

 

145

 

New restaurants opened

 

 

 

 

 

 

 

Restaurants permanently closed

 

1

 

 

1

 

 

2

 

2

 

Restaurants at end of period

 

82

 

59

 

141

 

99

 

44

 

143

 

 

As of March 28, 2011, there were 82 Company-owned and 59 franchised premium convenience restaurants operating in 18 states, the District of Columbia, and the United Arab Emirates (UAE). During the first quarter of fiscal 2011, we closed one underperforming Company-owned restaurant in Oak Park, IL at the expiration of its lease. During the first quarter of fiscal 2010, we closed two franchised restaurants, one in Minnesota and one in the UAE.

 

Our restaurants offer innovative, savory, made-to-order products featuring our authentic hearth-baked crackly crust signature Cosi® bread and fresh distinctive ingredients. We maintain a pipeline of new menu offerings that are introduced seasonally through limited time offerings to keep our products relevant to our target customers. Our menu features high-quality sandwiches, freshly-tossed salads, breakfast wraps, Cosi® Squagels®, hot melts, flatbread pizzas, S’mores and other desserts, and a variety of coffees along with other soft drink beverages, bottled beverages including premium still and sparkling water, teas, alcoholic beverages, and other specialty coffees and beverages. Our restaurants offer lunch and afternoon coffee in a counter-service format, with most offering breakfast and/or dinner and dessert menus as well.

 

We are currently eligible to offer franchises in 47 states and the District of Columbia. We offer franchises to area developers and individual franchise operators. The initial franchise fee, payable to us, for both an area developer and an individual franchise operator, is $40,000 for the first restaurant and $35,000 for each additional restaurant.

 

We believe that offering Cosi® franchised restaurants to area developers and individual franchisees offers the prospects of strong financial returns. By franchising, we believe we will be able to increase the presence of our restaurants in various markets throughout the country and generate additional revenue without the large upfront capital commitments and risk associated with opening Company-owned restaurants.

 

We believe that incorporating a franchising and area developer model into our strategy will position us to

 

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maximize the market potential for the Cosi® brand and concept consistent with our available capital, and we expect that Company-owned restaurants (restaurants that we own as opposed to franchised restaurants) will always be an important part of our new restaurant growth.

 

We also continue to explore strategic opportunities with our Cosi Pronto® (our grab-and-go concept) and full-service concepts in educational establishments, airports, train stations and other public venues that meet our operating and financial criteria.

 

Critical Accounting Policies

 

Our discussion and analysis of our consolidated financial condition and results of operations is based upon the consolidated financial statements and notes to the consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of the consolidated financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period.

 

We believe the application of our accounting policies, and the estimates inherently required therein, are reasonable and generally accepted for companies in the restaurant industry. We believe that the following addresses the more critical accounting policies used in the preparation of our consolidated financial statements and requires management’s most difficult and subjective judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. There have been no material changes in the application of our most critical accounting policies and estimates, judgments and assumptions during the first quarter of fiscal 2011.

 

Long Lived Assets: ASC 360-10-35 Property, Plant, & Equipment requires management judgments regarding the future operating and disposition plans for marginally-performing assets, and estimates of expected realizable values for assets to be sold. The application of this standard has affected the amount and timing of charges to operating results that have been significant in recent years. We evaluate possible impairment at the individual restaurant level periodically and record an impairment loss whenever we determine impairment factors are present. We consider a history of poor financial operating performance to be the primary indicator of potential impairment for individual restaurant locations. We determine whether a restaurant location is impaired based on expected undiscounted cash flows, generally for the remainder of the lease term, and then determine the impairment charge based on discounted cash flows for the same period.  Restaurants are not considered for impairment during the “ramp-up” period before they enter the comparable restaurant base, unless specific circumstances warrant otherwise.

 

Lease Termination Charges: ASC 420-10-30 Exit or Disposal Cost Obligations requires companies to recognize a liability for the costs associated with an exit or disposal activity when the liability is incurred, rather than at the time of a commitment to an exit or disposal plan. For all exit activities, we estimate our likely liability under contractual leases for restaurants that have been closed. Such estimates have affected the amount and timing of charges to operating results and are impacted by management’s judgments about the time it may take to find a suitable subtenant or assignee, or the terms under which a termination of the lease agreement may be negotiated with the landlord.

 

Accounting for Lease Obligations: In accordance with ASC 840-10-25 Leases, we recognize rent expense on a straight-line basis over the lease term commencing on the date we take possession. We include any rent escalations, rent abatements during the construction period and any other rent holidays in our straight-line rent expense calculation.

 

Landlord Allowances: In accordance with ASC 840-10-25 Leases, we record landlord allowances as deferred rent in other long-term liabilities on the consolidated balance sheets and amortize them on a straight-line basis over the term of the related leases.

 

Stock-Based Compensation Expense: In accordance with ASC 718-10-25 Compensation — Stock Compensation

 

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we recognize stock-based compensation expense according to the fair value recognition provision, which generally requires, among other things, that all employee share-based compensation be measured using a fair value method and that all the resulting compensation expense be recognized in the financial statements.

 

We measure the estimated fair value of our granted stock options using a Black-Scholes pricing model and of our restricted stock based on the fair market value of a share of registered stock on the date of grant. The weighted average fair values of the stock options granted through 2005, the last time we issued stock options, were determined using the Black-Scholes option-pricing model.

 

Income Taxes: We have recorded a full valuation allowance to reduce our deferred tax assets that relate primarily to net operating loss carry-forwards. Our determination of the valuation allowance is based on an evaluation of whether it is more likely than not that we will be able to utilize the net operating loss carry-forwards based on the Company’s operating results. A positive adjustment to income will be recorded in future years if we determine that we could realize these deferred tax assets.

 

We have adopted the provisions of ASC 740-10-25 Income Taxes beginning in fiscal 2007. No adjustment was made to the beginning retained earnings balance, as the ultimate deductibility of all tax positions is highly certain but there is uncertainty about the timing of such deductibility. No interest or penalties have been accrued relative to tax positions due to the Company having either a tax loss or net operating loss carry-forwards to offset any taxable income in all subject years. As a result, no liability for uncertain tax positions has been recorded.

 

Revenue

 

Restaurant Net Sales. Our Company-owned restaurant sales are composed almost entirely of food and beverage sales. We record revenue at the time of the purchase of our products by our customers.

 

Franchise Fees and Royalties. Franchise fees and royalties includes fees earned from franchise agreements entered into with area developers and franchise operators, as well as royalties received based on sales generated at franchised restaurants. We recognize the franchise fee in the period in which a franchise location opens or when fees are forfeited as a result of a termination of an area developer agreement. We recognize franchise royalties in the period in which sales are made by our franchise operators.

 

Gift Card Sales. We offer our customers the opportunity to purchase gift cards at our restaurants and through our website. Customers can purchase these cards at varying dollar amounts. At the time of purchase by the customer, we record a gift card liability for the face value of the card purchased. We recognize the revenue and reduce the gift card liability when the gift card is redeemed. We do not reduce our recorded liability for potential non-use of purchased gift cards.

 

Comparable Restaurant Sales

 

In calculating comparable restaurant sales, we include a restaurant in the comparable restaurant base after it has been in operation for 15 full months. We remove from the comparable restaurant base for the period any restaurant that is temporarily shut down for remodeling during the period. At March 28, 2011 and March 29, 2010, there were 82 and 97 restaurants in our comparable restaurant base, respectively.

 

Costs and Expenses

 

Cost of Food and Beverage. Cost of food and beverage is composed of food and beverage costs. Food and beverage costs are variable and fluctuate with sales volume.

 

Restaurant Labor and Related Benefits. The costs of restaurant labor and related benefits include direct hourly and management wages, bonuses, payroll taxes, health insurance and all other fringe benefits.

 

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Occupancy and Other Restaurant Operating Expenses. Occupancy and other restaurant operating expenses include direct restaurant-level operating expenses, including the cost of paper and packaging, supplies, repairs and maintenance, utilities, rent and related occupancy costs.

 

General and Administrative Expenses. General and administrative expenses include all corporate and administrative functions that support our restaurants and provide an infrastructure to operate our business. Components of these expenses include executive management costs; supervisory and staff salaries; non-field stock-based compensation expense; non-field bonuses and related taxes and employee benefits; travel; information systems; training; support center rent and related occupancy costs; and professional and consulting fees. The salaries, bonuses and employee benefits costs included as general and administrative expenses are generally more fixed in nature and do not vary directly with the number of restaurants we operate. Stock-based compensation expense includes the charges related to recognizing the fair value of stock options and restricted stock as compensation for awards to certain key employees and non-employee directors, except the costs related to stock-based compensation for restaurant employees which are included in restaurant labor and related benefits.

 

Depreciation and Amortization. Depreciation and amortization principally relates to restaurant assets.

 

RESULTS OF OPERATIONS

 

Our operating results for the three-month periods ended March 28, 2011 and March 29, 2010, expressed as a percentage of total revenues (except where otherwise noted), were as follows:

 

 

 

Three Months Ended

 

 

 

March 28,

 

March 29,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

Restaurant net sales

 

97.0

%

98.1

%

Franchise fees and royalties

 

3.0

 

1.9

 

Total revenues

 

100.0

 

100.0

 

Cost and expenses:

 

 

 

 

 

Cost of food and beverage (1)

 

23.0

 

23.4

 

Restaurant labor and related benefits (1)

 

38.0

 

39.4

 

Occupancy and other restaurant operating expenses (1)

 

33.5

 

33.4

 

 

 

94.5

 

96.2

 

General and administrative expenses

 

12.9

 

12.0

 

Depreciation and amortization

 

4.5

 

5.0

 

Closed store costs

 

0.1

 

 

Lease termination expense

 

0.1

 

 

Gain on sale of assets

 

(0.2

)

(0.3

)

Total costs and expenses

 

109.1

 

111.1

 

Operating loss

 

(9.1

)

(11.1

)

Other income

 

0.1

 

 

Net loss

 

(9.0

)%

(11.1

)%

 


(1)          Expressed as a percentage of restaurant net sales versus all other items expressed as a percentage of total revenues.

 

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Restaurant Net Sales

 

 

 

Restaurant net sales

 

 

 

(in thousands)

 

as a % of total
revenues

 

Quarter ended March 28, 2011

 

$

23,005

 

97.0

%

Quarter ended March 29, 2010

 

$

27,074

 

98.1

%

 

Restaurant net sales. Restaurant net sales decreased 15.0%, or approximately $4.1 million, during the first quarter of fiscal 2011 as compared to the first quarter of fiscal 2010. This was due primarily to the decrease of approximately $4.2 million, in net sales from the thirteen Company-owned restaurants in the District of Columbia sold to a franchisee during the second quarter of fiscal 2010 and a decrease of approximately $0.6 million in net sales related to Company-owned restaurants closed during and subsequent to the first quarter of fiscal 2010, partially offset by an increase in net sales in our comparable restaurant base of 3.0%, or approximately $0.7 million. For comparable restaurants, during the first quarter of fiscal 2011, our average guest check increased 1.5% and our transaction count increased 1.5% compared to the first quarter of fiscal 2010. The increase in average check was largely due to the price increase taken in the second quarter of 2010 as well as to higher catering sales in the first quarter of fiscal 2011 as compared to the prior year, partially offset by higher sales of breakfast items which historically have a lower average check than the rest of our menu items.

 

Franchise Fees and Royalties

 

 

 

Franchise fees and royalties

 

 

 

(in thousands)

 

as a % of total
revenues

 

Quarter ended March 28, 2011

 

$

704

 

3.0

%

Quarter ended March 29, 2010

 

$

525

 

1.9

%

 

Franchise fees and royalties. Franchise fees and royalties increased 34.3%, or approximately $0.2 million, to approximately $0.7 million, in the first quarter of fiscal 2011, as compared to the first quarter of fiscal 2010, due primarily to approximately $0.2 million increase in royalties from the thirteen Company-owned restaurants in the District of Columbia sold to a franchisee during the second quarter of fiscal 2010.

 

Costs and Expenses

 

 

 

Cost of food and beverage

 

 

 

(in thousands)

 

as a % of restaurant
net sales

 

Quarter ended March 28, 2011

 

$

5,296

 

23.0

%

Quarter ended March 29, 2010

 

$

6,329

 

23.4

%

 

Cost of food and beverage. The decrease in cost of food and beverage, as a percentage of restaurant net sales, during the first quarter of fiscal 2011, as compared to the first quarter of fiscal 2010, is due primarily to the favorable impact of the price increase taken at the end of the second quarter of fiscal 2010, the favorable impact of seasonal soup sold in the first quarter of 2011 as compared to the lobster bisque sold during the prior year first quarter and savings achieved on purchases of certain commodities, partially offset by the impact on total menu mix of an increase in sales of breakfast items which carry a higher cost of goods as a percentage of net sales when compared to items sold during our lunch and dinner day parts.

 

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Restaurant labor and related benefits

 

 

 

(in thousands)

 

as a % of restaurant
net sales

 

Quarter ended March 28, 2011

 

$

8,742

 

38.0

%

Quarter ended March 29, 2010

 

$

10,664

 

39.4

%

 

Restaurant labor and related benefits. The decrease in restaurant labor and related benefits, as a percentage of restaurant net sales, during the first quarter of fiscal 2011, as compared to the first quarter of fiscal 2010, is due primarily to the leveraging effect on labor of the increase in comparable net restaurant sales as well as the favorable impact on labor of the price increase taken at the end of the second quarter of fiscal 2010.

 

 

 

Occupancy and other restaurant
operating expenses

 

 

 

(in thousands)

 

as a % of restaurant
net sales

 

Quarter ended March 28, 2011

 

$

7,703

 

33.5

%

Quarter ended March 29, 2010

 

$

9,044

 

33.4

%

 

Occupancy and other restaurant operating expenses. The slight increase in occupancy and other restaurant operating expenses, as a percentage of restaurant net sales, during the first quarter of fiscal 2011, as compared to the first quarter of fiscal 2010, is due primarily to an increase in paper and packaging costs resulting from a year over year increase in catering sales as a percentage of total sales as well as higher credit card fees, partially offset by lower costs for repairs and maintenance of the restaurants in the quarter, as compared to the prior year.

 

 

 

General and administrative expenses

 

 

 

(in thousands)

 

as a % of total
revenues

 

Quarter ended March 28, 2011

 

$

3,056

 

12.9

%

Quarter ended March 30, 2010

 

$

3,321

 

12.0

%

 

General and administrative expenses. The decrease in general and administrative expenses of approximately $0.3 million during the first quarter of fiscal 2011, as compared to the first quarter of fiscal 2010, is due to lower occupancy costs at our corporate headquarter location resulting from a reduction of space in late 2010, lower legal related expenses when compared to the prior year quarter, and labor savings resulting from administrative workforce reductions that occurred during fiscal 2010.

 

 

 

Depreciation and amortization

 

 

 

(in thousands)

 

as a % of total
revenues

 

Quarter ended March 28, 2011

 

$

1,065

 

4.5

%

Quarter ended March 29, 2010

 

$

1,380

 

5.0

%

 

Depreciation and amortization. The lower depreciation and amortization expense during the first quarter of fiscal 2011, as compared to the first quarter of fiscal 2010, is due primarily to the impact of impairments recorded during and subsequent to the first quarter of fiscal 2010 as well as the continued depreciation and

 

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amortization of our comparable restaurant base.

 

 

 

Closed store costs

 

 

 

(in thousands)

 

as a % of total
revenues

 

Quarter ended March 28, 2011

 

$

21

 

0.1

%

Quarter ended March 29, 2010

 

$

 

0.0

%

 

Closed store costs. The closed store costs incurred during the first quarter of fiscal 2011 are related to the closing of one location at the expiration of its operating lease. We did not incur any closed store costs during the first quarter of fiscal 2010.

 

 

 

Lease termination expense

 

 

 

(in thousands)

 

as a % of total
revenues

 

Quarter ended March 28, 2011

 

$

17

 

0.1

%

Quarter ended March 29, 2010

 

$

1

 

0.0

%

 

Lease termination expense. The lease termination charge during the first quarter of fiscal 2011 is related to additional costs associated with our exercise of an option in the lease to surrender part of the office space at our Corporate Headquarters during the fourth quarter of 2010. The lease termination charge during the first quarter of fiscal 2010 was immaterial.

 

 

 

Gain on sale of assets

 

 

 

(in thousands)

 

as a % of total
revenues

 

Quarter ended March 28, 2011

 

$

41

 

0.2

%

Quarter ended March 29, 2010

 

$

87

 

0.3

%

 

Gain on Sale of Assets. The gain recognized during the first quarter of fiscals 2011 and 2010 is related to the sale of liquor licenses.

 

 

 

Other income

 

 

 

(in thousands)

 

as a % of total
revenues

 

Quarter ended March 28, 2011

 

$

10

 

0.1

%

Quarter ended March 29, 2010

 

$

 

0.0

%

 

Other income: We recognized other income of approximately $0.01 million during the first quarter of fiscal 2011 related to the discounting of the long-term portion of a note receivable. We did not recognize other income during the first quarter of fiscal 2010.

 

 

 

Net loss

 

 

 

(in thousands)

 

as a % of total
revenues

 

Quarter ended March 28, 2011

 

$

(2,140

)

(9.0

)%

Quarter ended March 29, 2010

 

$

(3,054

)

(11.1

)%

 

Net loss. The approximately $0.9 million decrease in our net loss during the first quarter of fiscal 2011, as compared to the first quarter of fiscal 2010, is due primarily to the improved restaurant operating margins

 

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resulting from the increase in net sales in our comparable restaurant base, the $0.3 million decrease in general and administrative expenses, the $0.3 million decrease in depreciation expense, and the higher franchise royalties from the sale of the thirteen Company-owned restaurants to a franchisee in the District of Columbia during the second quarter of fiscal 2010.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Cash and cash equivalents were approximately $9.3 million on March 28, 2011, compared with $10.3 million on December 27, 2010. We had negative working capital of ($0.2) million on March 28, 2011, compared with positive working capital of $1.1 million on December 27, 2010. The decrease in working capital as of the first quarter of fiscal 2011 is primarily due to the funding of the operating loss for the period. Our principal requirements for cash in 2011 will be for working capital needs and routine maintenance and remodels of selected existing restaurants.

 

Net cash used in operating activities during the three-month period ended March 28, 2011 was approximately $0.8 million, compared with $2.0 million of net cash used in operating activities in the three-month period ended March 29, 2010. The decrease in cash used in operating activities during the first quarter of fiscal 2011 was the result of a lower year-over-year operating loss net of depreciation expense and the timing of payments on certain insurance obligations.

 

Total cash used in investing activities during the first quarter of fiscal 2011 was approximately $0.2 million compared with net cash provided by investing activities of approximately $0.05 million during the first quarter of fiscal 2010. The year-over-year increase in cash used in investing activities is due to the higher capital expenditures primarily for remodels of existing Company-owned restaurants.

 

No cash was used in or provided by financing activities during the first quarter of fiscal 2011. Cash provided by financing activities of approximately $4.9 million during the first quarter of fiscal 2010 is from proceeds associated with the shareholder rights offering and the private placement of shares to our executive officers and outside directors.

 

We do not have any current plans to open additional Company-owned restaurants during fiscal 2011. However, we will continue to seek out and evaluate opportunities to develop new Company-owned locations in existing markets. We do expect to incur capital costs associated with remodeling and maintenance of existing Company-owned restaurants during the remainder of fiscal 2011. As we currently have no credit facility or available line of credit, we expect to fund any required restaurant remodeling and capital maintenance costs on existing Company-owned locations or required capital for new restaurant development, if any, from cash and cash equivalents on hand, expected cash flows generated by existing Company-owned restaurants, and expected franchise fees and royalties.

 

We believe that our current cash and cash equivalents and the expected cash flows from Company-owned restaurant operations and expected franchise fees and royalties will be sufficient to fund our cash requirements for working capital needs and remodeling and maintenance of existing restaurants for the next twelve months and for new Company-owned restaurant development, if any. Our conclusion is based on our expected performance for fiscal 2011 and includes a sensitivity analysis that projects varying levels of decline in consumer demand. The range of levels selected was based on our reasonable expectation of demand given the seasonality of our historical performance and the potential impact the current economic environment may have on consumer spending. In analyzing our capital cash outlays during the first quarter of fiscals 2011 and 2010, 88.5% and 70.6%, respectively, of our capital expenditures were spent on remodels and repairs and maintenance associated with existing Company-owned restaurants.

 

If our Company-owned restaurants do not generate the cash flow levels that we expect, if new franchised restaurants do not open according to our expectations, if we do not generate the franchise fees and royalties that we currently expect, if we incur significant unanticipated cash requirements beyond our normal liquidity needs, or if we experience other unforeseen circumstances, then, in order to fund our cash requirements, we

 

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may have to cease new Company-owned restaurant development efforts and may have to effect further labor reductions in general and administrative support functions, seek to sell certain Company-owned locations to franchisees and/or other third parties, seek other sources of  financing or take other actions necessitated by the impact of such unanticipated circumstances.

 

There can be no assurance that we will be able to obtain such financing or sell Company-owned locations to franchisees or other third parties or that we will be able to do so in a timely manner and on acceptable terms to meet our requirements. Given the continued instability in the credit and financial markets, it may be difficult for the Company to obtain additional financing and for franchisees to obtain the financing necessary to open restaurants or to acquire Company-owned locations. An inability to access additional sources of liquidity to fund our cash needs could materially adversely affect our financial condition and results of operations.

 

We have entered into agreements that create contractual obligations. These obligations will have an impact on future liquidity and capital resources. The table below presents a summary of these obligations as of March 28, 2011:

 

 

 

Payments Due by Period

 

 

 

(in thousands)

 

 

 

 

 

 

 

Due

 

Due

 

Due

 

 

 

Total

 

Due

 

Fiscal 2012

 

Fiscal 2014

 

After

 

Description

 

Obligations

 

Fiscal 2011

 

to Fiscal 2013

 

to Fiscal 2015

 

Fiscal 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt (1)

 

$

25

 

$

25

 

$

 

$

 

$

 

Operating leases (2)

 

52,466

 

10,380

 

22,651

 

14,133

 

5,302

 

Other long-term liabilities (3)

 

519

 

409

 

110

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total contractual cash obligations

 

$

53,010

 

$

10,814

 

$

22,761

 

$

14,133

 

$

5,302

 

 


(1)

Amounts shown include aggregate scheduled interest payments of $0.004 million. The pricipal amount of the debt, net of interest obligations, is included in the current portion of other long-term liabilities, in the attached consolidated balance sheets. This obligation is related to a trademark infringement settlement.

(2)

Amounts shown are net of an aggregate $0.5 million of sub-lease rental income due under non-cancelable subleases and include accrued contractual lease increases of approximately an aggregate $3.4 million, which are included in other long-term liabilities in the attached consolidated balance sheets.

(3)

These obligations are related to contractual obligations for lease termination agreements and for two obligations related to legal settlements. These obligations are non-interest bearing and are included in other long-term liabilities in the attached consolidated balance sheets.

 

We are obligated under non-cancelable operating leases for our restaurants and our administrative offices. Lease terms are generally ten years with renewal options and generally require us to pay a proportionate share of real estate taxes, insurance and common area and other operating costs. Some restaurant leases provide for contingent rental payments which are not included in the above table.

 

Certain of our lease agreements provide for scheduled rent increases during the lease term or for rental payments to commence at a date other than the date of initial occupancy. Rent expense is recognized on a straight-line basis over the term of the respective leases from the date we take possession. Our obligation with respect to these scheduled rent increases has been presented as a long-term liability in other liabilities in the accompanying consolidated balance sheets and totaled $3.4 million and $4.3 million as of the end of the first quarter of fiscals 2011 and 2010, respectively.

 

Certain of our leases also provide for landlord contributions to offset a portion of the cost of our leasehold improvements. These allowances are recorded as deferred liabilities and amortized on a straight-line basis as a reduction to rent expense over the term of the related leases. Included in other liabilities in the accompanying consolidated balance sheets for the first quarter of fiscals 2011 and 2010 were landlord allowances of $0.8 million and $1.2 million, respectively.

 

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As of March 28, 2011, the Company had outstanding approximately $0.2 million in standby letters of credit, which were provided as security deposits for certain of the lease obligations. The letters of credit are fully secured by cash deposits or marketable securities held in accounts at the issuing banks and are not available for withdrawal by the Company. These amounts are included as a component of “Other Assets” in the accompanying consolidated balance sheets.

 

In fiscal 2001, we entered into a settlement agreement involving a trademark dispute. The settlement agreement requires us to make annual payments of approximately $0.03 million through 2011. The estimated present value of those future payments is included in the current portion of other liabilities in the accompanying consolidated balance sheets.

 

During fiscal 2008, we entered into a settlement agreement involving a claim from a former employee. The settlement agreement required us to pay $0.3 million in an initial payment during the first quarter of fiscal 2009 and another $1.0 million in the aggregate in non-interest bearing monthly installments thereafter through 2012. The amount of this settlement is included in other liabilities in the accompanying consolidated balance sheets.

 

During fiscal 2009, we entered into a settlement agreement involving a customer claim alleging damages under the American with Disabilities Act with regard to access at our restaurants. The settlement requires us to pay $0.08 million in the aggregate in non-interest bearing quarterly installments commencing in fiscal 2010 through fiscal 2012. The amount of this settlement is included in other liabilities in the accompanying first quarter of 2011 balance sheet.

 

Purchasing

 

We have agreements with some of the nation’s largest food, paper, and beverage manufacturers in the industry. This enables us to provide our restaurants with high quality proprietary food products and non-food items at competitive prices. We source and negotiate prices directly with these suppliers and distribute these products to our restaurants primarily through a national network that consists of some of the nation’s largest independent distributors. We do not utilize a commissary system. Our inventory control system allows each restaurant to place orders electronically with our master distributor and then transmits the invoices electronically to our accounts payable system. Our scalable system eliminates duplicate work, and we believe it gives our management tight control of costs while ensuring quality and consistency across all restaurants.

 

We have an agreement with Distribution Market Advantage, Inc. (“Distribution Marketing Advantage”) that provides us access to a national network of independent distributors. Under this agreement the independent distributors supply us with approximately 79% of our food and paper products, primarily under pricing agreements that we negotiate directly with the suppliers. This agreement was renegotiated and has been extended through December 2013.

 

We have a long-term beverage marketing agreement with the Coca-Cola Company. We received a marketing allowance under this agreement, which is being recognized as a reduction to expense ratably based on actual products purchased. Effective January 1, 2010, the beverage marketing agreement with the Coca-Cola Company was amended to provide for additional products as well as higher marketing allowances based on purchases.

 

In October 2010, we entered into an agreement to purchase all contracted coffee products through a single supplier, Royal Cup Coffee, Inc. This agreement expires in October 2015.

 

Our primary suppliers and independent distributors have parallel facilities and systems to minimize the risk of any disruption of our supply chain.

 

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Self-Insurance

 

We have a self-insured group health insurance plan. We are responsible for all covered claims to a maximum limit of $100,000 per participant and an additional aggregating maximum limit of $50,000 for the plan year. Benefits paid in excess of these limits are reimbursed to the plan under our stop-loss policy. In addition, we have an aggregate stop-loss policy whereby our liability for total claims submitted cannot exceed a pre-determined dollar factor based upon, among other things, past years’ claims experience, actual claims paid, the number of plan participants and monthly accumulated aggregate deductibles. During fiscals 2010 and 2009, we did not exceed this pre-determined maximum. For our 2011 plan year, this pre-determined dollar amount is $2.1 million. The balance in the self-insurance reserve account at March 28, 2011 and December 27, 2010 was approximately $0.3 million and $0.2 million, respectively.

 

CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

 

We caution that any forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) contained or incorporated by reference in this Form 10-Q or made by our management involve risks and uncertainties and are subject to change based on various important factors, many of which may be beyond our control. Accordingly, our future performance and financial results may differ materially from those expressed or implied in any such forward-looking statements. For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Any such forward-looking statements are subject to risks and uncertainties, including, without limitation, those described in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December, 27, 2010. If any of these risks or uncertainties actually occurs, our business, financial condition or operating results could be materially and adversely affected, and the trading price of our common stock could decline. We do not undertake to publicly update or revise our forward-looking statements even if our future changes make it clear that any projected results expressed or implied therein will not be realized.

 

Listed below are just some of the factors that would impact our forward looking statements:

 

·

the cost of our principal food products and supply and delivery shortages or interruptions;

 

 

·

labor shortages or increased labor costs;

 

 

·

changes in demographic trends and consumer tastes and preferences, including changes resulting from concerns over nutritional or safety aspects of beef, poultry, produce or other foods or the effects of food-borne illnesses, such as E.coli, “mad cow disease” and avian influenza or “bird flu;”

 

 

·

competition in our markets, both in our existing business and locating suitable restaurant sites;

 

 

·

our operation and execution in new and existing markets;

 

 

·

expansion into new markets, including foreign countries;

 

 

·

our ability to attract and retain qualified franchisees and our franchisees’ ability to open restaurants on a timely basis;

 

 

·

our ability to locate suitable restaurant sites in new and existing markets and negotiate acceptable lease terms;

 

 

·

the rate of our internal growth, and our ability to generate increased revenue from our new and existing restaurants;

 

 

·

our ability to generate positive cash flow from existing and new restaurants;

 

 

·

fluctuations in our quarterly results due to seasonality;

 

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·

increased government regulation and our ability to secure required governmental approvals and permits;

 

 

·

our ability to create customer awareness of our restaurants in new markets;

 

 

·

the reliability of our customer and market studies;

 

 

·

cost effective and timely planning, design and build-out of new restaurants;

 

 

·

our ability to recruit, train and retain qualified corporate and restaurant personnel and management;

 

 

·

market saturation due to new restaurant openings;

 

 

·

inadequate protection of our intellectual property;

 

 

·

our ability to obtain additional capital and financing;

 

 

·

adverse weather conditions, which impact customer traffic at our restaurants; and

 

 

·

adverse economic conditions.

 

The words “believe,” “may,” “will,” “should,” “anticipate,” “estimate,” “expect,” “intend,” “objective,” “seek,” “plan,” “strive,” “project” or similar words, or the negatives of these words, identify forward-looking statements. We qualify any forward-looking statements entirely by these cautionary factors.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Interest Rate Risk

 

Our market risk exposures are related to our cash and cash equivalents and interest that we may pay on debt. We have no derivative financial commodity instruments. We invest our excess cash in investment grade, highly liquid, short-term investments. These investments are not held for trading or other speculative purposes. Changes in interest rates affect the investment income we earn on our investments and, therefore, impact our cash flows and results of operations. During the first quarter of fiscal 2011, we held no short-term investments and, as a result, a hypothetical one percentage point interest change from those in effect during the first quarter of fiscal 2011 would not have resulted in a fluctuation of interest income. In the first quarter of fiscals 2011 and 2010, interest income was not material.

 

Foreign Currency Risk

 

As of first quarter of fiscal 2011, all of our transactions are conducted, and our accounts denominated, in U.S. dollars. Accordingly, we are not exposed to foreign currency risk.

 

Inflation

 

The primary inflationary factors affecting our business are food and labor costs. Some of our food costs are subject to fluctuations in commodity prices. Volatility in the commodity markets such as the wheat and dairy markets can have an adverse impact on our results from operations. Some of our hourly personnel at our restaurants are paid at rates based on the applicable minimum wage, and increases in the minimum wage will directly affect our labor costs. Many of our leases require us to pay taxes, maintenance, repairs, insurance, and utilities, all of which are generally subject to inflationary increases. Historically, inflation has not had a material impact on our results of operation.

 

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Item 4. Controls and Procedures

 

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our “disclosure controls and procedures” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the fiscal year covered by this report. Based on this evaluation, our Chief  Executive Officer and our Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective (i) to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) to ensure that information required to be disclosed by us in the reports that we submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.

 

There have  been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the first fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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Part II.  OTHER INFORMATION

 

Item 1:    LEGAL PROCEEDINGS

 

From time to time, we are a defendant in litigation arising in the ordinary course of our business, including but not limited to, claims resulting from “slip and fall” accidents, claims under federal and state laws governing access to public accommodations or other federal and state laws applicable to our business operations, employment-related claims, property damages, claims from guests alleging illness, injury or other food quality, health or operational concerns, and enforcement of intellectual property rights.

 

Item 1A:  RISK FACTORS

 

In addition to the other information set forth in this report, the factors discussed in “Part I.  Item 1A.  Risk Factors” in our Annual Report on Form 10-K for our 2010 fiscal year could materially affect the Company’s business, financial condition or operating results. There have been no material changes in our risk factors since our Annual Report on Form 10-K for the year ended December 27, 2010.

 

Item 6:  EXHIBITS

 

(a)                                  Exhibits:

 

Exhibit Number

 

Description

 

 

 

Exhibit 31.1

 

Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

Exhibit 31.2

 

Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

Exhibit 32.1

 

Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

COSI, INC.

 

 

 

 

 

 

 

 

Date: May 12, 2011

 

 

By:

/s/ JAMES HYATT

 

 

 

James Hyatt

 

 

 

President,

 

 

 

Chief Executive Officer, and

 

 

 

Director

 

 

 

 

 

 

 

 

Date: May 12, 2011

 

 

By:

/s/ WILLIAM KOZIEL

 

 

 

William Koziel

 

 

 

Chief Financial Officer (chief accounting officer)

 

 

 

Treasurer and Secretary

 

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EXHIBIT INDEX

 

Exhibit 31.1

 

Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

Exhibit 31.2

 

Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

Exhibit 32.1

 

Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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